Academic research from Professor Ian Marsh and Norman Niemer of Cass Business School, London, has been released by ISLA, AIMA and LIBA, which finds no strong evidence that the emergency short selling restrictions imposed in various markets around the world have changed the behaviour of stock returns.
The International Securities Lending Association, the Alternative Investment Management Association and the London Investment Banking Association jointly commissioned this independent research to contribute to the wider regulatory reviews ongoing by various national and international regulatory bodies, including IOSCO (the International Organization of Securities Commissions) and CESR (the Committee of European Securities Regulators). The researchers examined daily returns on UK, US, Italian, French and German shares before and after the introduction of restrictions on short selling, including shares which are subject to the restrictions, and those which are not.
The main findings of the research are:
1. No strong evidence that restrictions on short selling changed the behaviour of stock returns. Stocks subject to the restrictions behaved very similarly both to how they behaved before their imposition and to how stocks not subject to the restrictions behaved.
2. Comparing behaviour across countries where the nature of the restrictions differed, the authors found no systematic patterns consistent with the expected effect of the new regulations, i.e. no evidence of a reduced probability of large price falls.
3. The authors also found no sign of any detrimental impact of the constraints in terms of reduced efficiency of pricing.
4. Regression analysis suggested that changes in stock returns were driven mainly by other factors affecting the financial sector as a whole rather than the restrictions on short selling. That is, some systematic changes in the behaviour of financial sector stocks could be discerned, but no strong evidence of a systematic impact of the restrictions could be identified.
NOTE: The report refers to one caveat which relates to the shortness of the post-restrictions period in most countries, which does not appear to the authors to change the robustness of their findings.
In a joint statement, the associations request that this research be considered carefully. They continue to offer their full support to all efforts in identifying appropriate and reasonable measures for the longer-term security and stability of the financial system. On the basis of this research, the associations see no case for continued bans on short selling as there is no strong evidence that these have been effective in reducing share price volatility or limiting share price falls.
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